4 Lessons: What we've learned from Detroit

DETROIT (MONEY Magazine) -- Richard and Pamela Mack are making a big bet on the future of Detroit: They've just purchased a huge house in a city that's been hollowed out by the Great Recession and the near death of the American auto industry.

One in 10 homes here stands vacant, according to Data Driven Detroit, and unemployment in the metro area is at a staggering 15%, reports the Bureau of Labor Statistics. Some would say it's crazy to buy property in this city right now, but a good value investment always looks like a bad idea to most people. That's what makes it a value.

For the past year MONEY and its sister Time Inc. magazines have chronicled how Detroiters like the Macks are coping with what's happened in and around their hometown. The stories are different, but what's universal is that while Detroit may have become a synonym for economic decline, those who live and work in the area don't have the option of standing by idly.

You may have encountered similar, if less daunting, challenges in the recession and so-called recovery, or you may well indeed down the line. The smart, realistic strategies laid out here can help you get going when your personal economy gets tough.

When Paula Batchelor took a buyout last year -- figuring she was likely to be laid off if she didn't -- she wasn't worried about landing another gig. Having worked 11 years as a graphic-design project manager for a health insurance company downtown, "I knew I had skills," she says.

But Batchelor, a single mother of a 6-year-old, quickly realized just what it meant to live in one of the worst job markets in the country. By year's end, the resident of Royal Oak -- a suburb north of the city -- still had no work and couldn't make her mortgage payment. "I was feeling the pressure," says Batchelor, who's now 55.

Months of financial struggle followed. Then, in June, her older sister, Karen, an attorney who'd gone into life coaching, had a proposal. She'd used social media, including Facebook, to market her own biz; Paula had skills in project management and graphic design. Why not combine their talents and help small businesses with social-media marketing?

The firm they founded, Color Me Social, had $1,500 in sales in August, a promising, if modest, start. While the money isn't coming in fast enough for Paula to save her home from foreclosure -- she and her daughter are moving in with Karen -- Paula is hopeful that this is the beginning of her turnaround. "You have to stick your neck out and take a chance," she says.

How to Make It Work

Beware the first idea. Startup activity in 2009 was at its highest level since the late '90s -- no doubt because so many people were untethered from regular jobs. But novice entrepreneurs face fierce odds: Only half of new businesses survive five years, reports the Small Business Administration. And companies begun by unemployed people, who are scrambling for a quick idea, have dimmer prospects.

Whether you're looking for a sideline or a full-time business, know that "the ideas you can easily come up with are the most likely to fail," warns Scott Shane, author of The Illusions of Entrepreneurship.

That's because entrepreneurs often start with what they want to do, rather than what people want to buy, he says.

The Batchelor sisters were unusual in that their idea came out of a market need: Karen was inspired after having been bombarded with questions from friends who wanted to use social media in their businesses but didn't know how.

Leverage what you know. "Experience is the most important asset you have to have," says Mel Ettenson, a counselor at the Detroit chapter of SCORE, a volunteer organization that assists small businesses.

Between Karen's experience marketing her coaching business and Paula's work in project management, the Batchelors think they have the right skills. But if your idea is not in an area in which you have expertise, moonlight in the field or take a class that will introduce you to it.

Focus on process as much as product. Many would-be entrepreneurs get caught up in fantasies of their product or service, says Ettenson. "But to convert a dream into a profitable business, you must have a plan," he says.

In other words, even if you bake the world's greatest pastries, you won't be able to make a viable business of it if you haven't figured out how to manufacture, deliver, and sell them. Mindful of this, Paula and her sister thought early on about what back-office systems they'd need to efficiently handle product management, billing, and other essential tasks.

The real estate crash has been tough on Richard and Pamela Mack. Their condo overlooking the Detroit River -- where Pamela lived before they married -- was appraised at $80,000 in 2003. Now the apartment, which they're renting out, is worth closer to $25,000, based on asking prices for other units in the building.

The house they've been living in -- a four-bedroom in the upscale University District they bought for $200,000 in 2003 -- is around the corner from similar-size houses listed for $100,000 or less.

The decline in their property values is hardly unusual for the city. What is surprising is the fact that the Macks are buying another house. Over the past year, the two attorneys, who have a 2-year-old son, have made offers on 17 properties.

Finally, this September they closed on a six-bedroom home. The 1925 Tudor-style in the historic Palmer Woods neighborhood had sold for over $500,000 in 2005, but it cost the Macks just $114,000 in a foreclosure sale.

Their plan: Move in, rent out their University District home along with the condo, and in 20 years have a real estate nest egg for retirement. "I get to support the city that I love and be a part of a very good investment," says Richard. "It's win-win."

How to Make It Work

Have a margin of safety. The Macks' investment entails plenty of risks. Although their house looks like a bargain, there's no guarantee that real estate prices will rebound or that they won't fall further.

So when does a "deep value" investment make sense? Take the counsel of famed investor Benjamin Graham and be sure there's a margin of safety, or a comfortable gap between the price you're paying and what you conservatively think it's worth. Which leads to ...

Think income, not capital gains. Most of us think of real estate as a capital-appreciation investment -- meaning that the return comes from a rise in the property's value.

But income from rent can cushion the margin of safety, and many advisers think it's more profitable to view real estate as an income investment anyway, since values aren't expected to balloon anytime soon. At current prices, in a nice Detroit neighborhood, you can get more in rent than your carrying costs, says realtor Christine Winans of Prudential HWWB in Birmingham, Mich.

That improves the cushion for the Macks, even if they plan to live in the house. (They can always rent it out if they move again.) A real estate agent can help you figure out whether the prospects are as good in your area.

Be prepared for care and feeding. As a real estate investor, be ready to put in sweat equity. That means fielding calls at 2 a.m. complaining about a burst pipe, or paying a property manager to handle such issues for you.

And because a bad tenant could cost you thousands in rent, damage, and legal fees, you'll need to do due diligence upfront including background checks, credit checks, even a Facebook check, advises Shuki Haiminis, president of real estate brokerage Lofts.com.

Barbara Stachowski, who worked on land development projects for an engineering firm, was making photocopies at work one day in 2006 when her supervisor asked, "Hey, you got a second?" By the time they got to the conference room, Stachowski knew what was coming: With business having slowed down, she was being laid off.

"It was scary but exhilarating," recalls Stachowski, now 53. She'd been contemplating a career change for years, and this was her chance. In 2007 she entered a master's program in social justice at Detroit's Marygrove College. And today she has a job she loves: a contract position directing Weed & Seed, a crime-prevention and community-revitalization program in Hamtramck, a small city that's surrounded by Detroit.

It hasn't been easy. She's taken a 25% pay cut and is paying for her own health insurance, all while shouldering $25,000 in student debt. "But reinventing yourself takes time," she acknowledges. And already people are starting to recognize that she's good at what she does. "Just today I got two calls for possible consulting jobs," she says.

How to Make It Work

Give yourself time. Stachowski is right about how hard it is to change professions; it rarely takes less than three years, says Herminia Ibarra, a professor at the Insead international graduate business school. That's because you need to figure out what you're looking for -- a trial-and-error process for most people -- and then gain relevant experience and make connections. So if you're thinking you could use a backstop career, start moving on it, whether by moonlighting or taking a night course, before the layoff comes.

Focus your retraining. Going back to school can be a good tool for jump-starting a career change, but you'll need to do a cost-benefit analysis. In your forties and up, you don't have as much career left to earn back your tuition expenses.

Besides, a general degree, like an MBA, probably won't buy you much -- most of the benefit comes not from what you learn but from the implication that you've met a certain standard, says New York City career coach Stanley Back.

Since a long résumé can serve the same purpose, it is more cost-efficient to take a few courses that would sharpen specific skills you know you need for the transition -- or go for a highly focused degree, as Stachowski did.

Play up your transferable skills. You may not need to acquire more training if you can convince hiring managers that you're a shoo-in. That comes down to your sell.

"You have to position yourself relative to what you want to do in the future, not what you've done in the past," says Ibarra. So if you're a marketing specialist trying to get a job as a project manager, talk about how you've completed projects on a tight deadline rather than sharing details about campaigns you've led.

Trained as an engineer, Mark Munteanu moved to the Detroit area from his native Romania in 1996, exactly as his brother, Gabriel, also an engineer, had done a year earlier. The U.S. was Mark's "dreamland." And he made a good living working for the Motor City's automotive firms -- until November 2008, when he was laid off from his job at a seating manufacturer.

Soon after, he attended a job fair held by a military-vehicle manufacturer. "They had 100 positions open, and there were 8,000 people there," says Munteanu. "It was utterly a nightmare." The experience got him thinking beyond Detroit.

Searching online, he found a contract job with airplane manufacturer Airbus in Mobile. "When I saw this chance, I said, 'I have to take it.' I don't know when I'm going to get it again." At first, he was flying back and forth between his family in Michigan and the job in Alabama.

But soon the position became permanent, and Munteanu's wife and two sons joined him down South. It was tough to leave his brother, who remains employed in Detroit. And he's not happy that his Michigan house remains unsold. But, says Munteanu, "I took it like a new challenge in my life."

How to Make It Work

Remember, you've done this before. Major change is psychologically difficult anytime. Ironically, when you're dealing with a job loss, you may have the strongest urge to stay put in your current location or career field.

"It's twice as hard to let go of the rest of your support structure," says David Lewis, an executive at the staffing firm Express Employment Professionals. His advice: Recall another time when you've made a big move to remind yourself that you're capable of adjusting.

That kind of thinking helped Munteanu make the transition: "I moved from Romania to Detroit. Shouldn't I have the courage to leave Detroit for a better life?" he asks.

Blend in with the locals. Even when you're willing to move on from a city where your opportunities have faded, you face big practical barriers. Out-of-town candidates typically don't get past the first round of screening, as hiring managers don't want to deal with logistical hassles, says Lewis.

Thus, Lewis suggests not including your address or the location of past jobs on your résumé. Or tap into your network to help get special consideration of your application; Munteanu had an Airbus engineer he'd met at a conference put in a good word.

Don't get stumped by "sunk costs." Aversion to loss doesn't just make you cling to the familiar, it also messes up your internal calculators. Most of us are more susceptible to the sunk-cost fallacy -- the notion that past investments commit us to future ones. That's why a blackjack player says to himself, "I won't get up from the table until I win back the $200 I'm down," why it's so hard to dump a losing stock, and why the prospect of selling your house at a loss might prevent you from taking a better job in another city.

While Munteanu was able to avoid getting bogged down in the sunk costs of his unsellable home -- "I don't see my future being tied to a house," he says -- few people can be so unemotional in assessing their own situations. So pretend you're giving advice to a friend, instead: Would you suggest he throw good money after bad, or move on to better prospects?